Where Regulation Has a Place - The UK Peer to Peer Sector

We have often been at the front of those criticising the FCA and the over burden of regulation in the lending market. Where we have always been a strong believer of regulation is in the Peer to Peer lending sector, and recent news from across the Atlantic might be about to show why.

We've always stood against regulation in a free market, where we should be able to lend our own money to who we want, when we want and on whatever terms we want so long as the lender and borrower agree to the terms. If we are right with our bet that the money will be repaid, we make money. If we are wrong, we lose money. We take the risk and the rewards but it is always done by calculated assessments using data we obtain through Credit Checks etc.

The odd exception to our stance on regulation does of course occur, one of those exceptions where we would recommend more regulation is the world of Peer to Peer lending. With Peer to Peer lending, we wouldn’t be lending our own money. We would instead be lending other people’s money and taking some sort of commission.

This is risky for the investor; they have a lot more risk which they aren’t able to assess directly. They have to trust that the platform is solvent, honest and transparent. They then have to trust that the people they are lending the money too will make repayments on time. This part is extremely difficult as the platform will not given them details beyond very vague data points that means they won’t ever be able to identify the applicant.

Over the last few weeks several US based Peer to Peer platforms have shown signs of being in trouble. Lending Club is one that has seen some very rocky press. Confidence in the platform has been shaken and a collapse was likely the last we heard. Private lenders seem to be running for the hills. The truth is though that we just don’t know because the whole thing is very non transparent. Lending Club isn’t alone though; there are multiple P2P sites in the US running into issues.

Compare that to Peer to Peer in the UK though and we believe that the FCA seem to have a more understanding grasp of how it all works and actually expect platforms to have fail safe’s in place should the platform go belly up. These include separate reserves set aside so that if the platform fails, the fund can be used to pay staff to wind down the loan book and recoup the money for the lenders.

This to us is very smart, and UK peer to peer services might look on it as an extra costs but it really isn’t. It gives investors more confidence, when investors have more confidence they tend to spend more. This then in turn benefits the platform.

The FCA also has the right to step in and check the loan book of the Peer to Peer service. This is also a good step in our opinion. When holding other people’s money, there does need to be independent oversight to make sure that the platform is solvent and not being run as a Ponzi scheme. The FCA can’t stop a Ponzi scheme from being born, but what it can do is step in and close things down before a £50,000 Ponzi scheme becomes a £10m mess.

The Peer to Peer service is something we have looked into before; we think it is the future and will be mainstream in the years to come. The only thing that concerns us is the amount of problems you run into when administering other people’s money. Compare that to the easy life we currently have if we just stick to lending our own capital.